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Monetary Policy

RBI and Monetary Policy in India


What is Monetary Policy?
• Refers to actions taken by central banks to affect monetary
magnitudes or other financial conditions.

• Operates on monetary magnitudes or variables.

• Monetary Policy ultimately operates through its influence on


expenditure flows in the economy.
GOALS OF MONETARY
POLICY
Full Employment
Price stability
Economic growth
Balance of payments
Monetary policy challenges
• Challenges with globalisation
• Challenges for emerging market economies
TOOLS OF MONETARY
POLICY
• Qualitative
 Allocation of credit(Eg-Rationing Credit)
 Margin Requirements
 Moral Suasion
 Other Tools
TOOLS OF MONETARY
POLICY
• Quantitative
 Supply of money(Eg-Bank Rate)
 Open market operations
 Changing cash reserve ratio
 Undertaking selective credit controls
Discount Rate (Bank Rate)
• Discount rate is the rate of interest charged by the
central bank for providing funds or loans to the
banking system.

• Funds are provided either through lending directly or


rediscounting or buying commercial bills and
treasury bills.
Variations in Reserve Ratios
• Banks are required to maintain a certain
percentage of their deposits in the form of
reserves or balances with the RBI
• It is called Cash Reserve Ratio or CRR
• Current CRR is-
Open Market Operations (OMOs)
• OMOs involve buying (outright or
temporary) and selling of govt securities
by the central bank, from or to the public
and banks.
• RBI when purchases securities, pays the
amount of money by crediting the reserve
deposit account of the seller’s bank, which
in turn credits the seller’s deposit account
in that bank.
CHANGING THE CASH
RESERVE RATIO
• The bank have to keep certain amount of bank
money with them selves as reserves against
deposits.
• The increase in the cash rate leads to the
contraction of credit only when the banks excess
reserves.
• The decrease in the cash rate leads to the
expansion of credit and banks tends to make
more available to borrowers.
Instruments
Operation of Monetary
1. Discount Rate
(Bank Rate) Policy
2.Reserve Ratios Operating
Target
3. Open Market
Operations
• Monetary Base
• Bank Credit Intermediate
• Interest Rates Target
•Monetary
Aggregates(M3)
Ultimate
•Long term Goals
interest rates
•Total Spending
• Price Stability
Etc.
Control
Y=C+I+G+NX

Int MS GDP Controlled


Inflation

Short -Term
Long -Term Measure
Measure
• Economic development
• CRR
from deficit financing
• SLR
• Repo
EXPANSIONARY MONETARY
POLICY
Problem - Recession and unemployment

Measures- (1) Central bank buys securities


through open market operation
(2) It reduces cash reserves ratio
(3) It lowers the bank rate
 
Money supply increases
 
Investment increases
 
Aggregate demand increases
 
Aggregate output increases by a multiple of
the increase in investment
TIGHT MONETARY POLICY
• Problem: Inflation

Measures: (1) Central bank sells securities


through open market operation
(2) It raises cash reserve ratio
and statutory liquidity
(3) It raises bank rate
(4) It raises maximum margin against
holding of stocks of goods
Money supply decreases

Interest rate raises


 
Investment expenditure decline

Aggregate demand declines


 
Price level falls
 
RBI Annual Policy Statement
for 2010-11
• The Monetary Policy for 2010-11 is set against a rather complex
economic backdrop.

• This statement is organised in two parts-


 Part A covers Monetary Policy measures
 Part B covers Developmental and Regulatory Policies
PART-A
It is divided into four Sections:
 Section I provides an overview of global and
domestic macroeconomic developments;
 Section II sets out the outlook and projections for
growth, inflation and monetary aggregates;
 Section III explains the stance of monetary policy;
 Section IV specifies the monetary measures.
PART-B
• It is organised into six sections:
 Financial Stability (Section I),
 Interest Rate Policy (Section II),
 Financial Markets (Section III),
 Credit Delivery and Financial Inclusion (Section IV),
 Regulatory and Supervisory Measures for Commercial
Banks (Section V)
 Institutional Developments (Section VI).
The state of the economy
• Global economy
– High levels of unemployment, which are close
to 10 per cent in the US and the Euro area.
– Core measures of inflation in EMEs,
especially in Asia, have been rising.
Outlook and projections
• GDP Growth Projection
– RBI placed its GDP growth projection for 2010-11 at 8.0% with
an upside bias under the assumption of a normal monsoon and
good performance of the industrial and services sectors.

• Inflation Projection
– Keeping in view domestic demand-supply balance and the
global trend incommodity prices, the baseline projection for WPI
inflation for end-March 2011 is Placed at 5.5%.
• Monetary Projection
– The projection of money supply growth (M3)=
17%.
– aggregate deposits of Scheduled Commercial
banks (SCBs) are projected to grow by 18%.
– The growth in non-food credit of SCBs is
placed at 20%.
Third Quarter Review of
Monetary Policy 2010-11
India’s Monetary Policy
Update
Inflation and Monetary Policy
• Inflation is always considered as a major vexation for the India’s central
bank.
• India's food inflation rate declines to 10.39 per cent on March 03, 2011  
• Food inflation rises to 11.49 percent on February 24, 2011 
•  India food inflation declines to 11.05 percent on February 17, 2011
• India food inflation declines to 13.07 percent on February 10, 2011
• India food inflation rose at 17.05 percent on February 3, 2011 
• India food inflation rose at 15.57 percent on January 27, 2011  
 
•  
•  
•  
• The inflation rate in India was last reported at 9.3
percent in January of 2011.
• From 1969 until 2010, the average inflation rate in
India was 7.99 percent reaching an historical high of
34.68 percent in September of 1974 and a record low
of -11.31 percent in May of 1976.
RBI raises rates, warns on food
inflation(Tue Jan 25, 2011)
• The RBI raised its repo rate , at which it
lends to banks, to 6.5 percent from 6.25
percent and it lifted its reverse repo rate ,
at which it borrows from banks, to 5.5
percent from 5.25 percent.
India needs tight monetary po
licy: C Rangarajan
• C. Rangarajan, the chairman of the Prime
Minister's Economic Adivisory Council,
said he expected headline inflation to ease
to 7 percent by March 2011
• He saw foreign direct investment at $27.6
billion in FY11, rising to $40 billion in
2011/12.
RBI extends special liquidity
measures till April 8 (25 JAN, 2011)

• Banks are allowed to sell some of the


government securities to RBI to raise
funds.
• The RBI's special measures enable banks
to avail one per cent more funds through
the liquidity adjustment facility (LAF),
based on their deposits. 
The Monetary Measures
• Past Repo Rate - 6.25%
Current Repo Rate - 6.50%

Past Reserve Repo Rate - 5.25%


Current Reserve Repo Rate - 5.50%

Past CRR Rate - 6.0 %


Current CRR Rate - 6.0 %

• Past Statutory Liquidity Ratio- 25%


• Current Statutory Liquidity Ratio -24%
Interest Rate-5.50%
Growth Rate- 8.90%
Inflation Rate -9.47%
Jobless Rate-8.00%
Current Account-16
Exchange Rate - 45.3300

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